Kenya Sugar Industry; East Africa’s bitter-Sweet story

Mumias-power-station

Mumias Sugar has incurred significant losses over the years, it is operating on gov’t bailout, but its survival very much in doubt given a host of challenges the company is dealing with.Photo/FILE/Nation Media Group

 

Sugar cultivation in Kenya has a long history, dating to 1922. There are three sugar belts in the country, and sugar is the second largest contributor to Kenya’s agricultural production growth after tea.

Climatic conditions in Western Kenya and the Coast naturally favour sugar growing, and indeed 5 out of the six functioning sugar factories in Kenya are located in the Western Belt.

The sugar industry in Kenya has struggled for many years because of various reasons, including lack of accountability and transparency, poor management, excessive taxation and financial mismanagement leading to delayed payments to farmers and turf wars in court with stakeholders.

Government commitment to reform has also been lacking in previous years. Roughly 90% of the total area dedicated to sugar cane farming in Kenya is occupied by small-scale growers; the remaining area is held by sugar factories in form of small estates. There are six functioning sugar factories in Kenya, with most of them publicly owned.

Food Agriculture Organization (FAO) and (Business Monitor International (BMI) reports forecast sugar production to stagnate on the 2014/15 level in 2015/16, at approximately 52,000 Metric tonnes.
The outlook for the country’s sugar industry is bleak, though Regional Trade bloc Common Market for Eastern and Southern Africa (COMESA) has given Kenya a one-year extension on sugar safeguards from the regional states, limiting the entry of sweetener into the country.

The one-year extension, to protect the country from influx of cheap sugar COMESA countries has been issued under the existing safeguard subject to review and renewal for another one year.

Analysts however do not foresee a significant game changer in the next year given the the struggling Mumias Sugar, the largest sugar company in Kenya, turf wars in the Western Belt between two recent players and the government’s dragging of feet in privatizing failing Sugar Companies in the Western Belt.

There is hope however, in the commercialisation of one of the largest and highly lauded Kwale International Sugar Company Limited, a private company backed by Mauritius’ successful sugar player – Omnicane and strong financial backing that began the journey to cultivation and production of sugar in 2010-11.

KISCOL’s biggest advantage is the mechanized approach, Omnicane’s experience, and sugar cane growing model (KISCOL cultivates over 80% of its sugar cane, with the rest done in partnership with local authorities).

Though KISCOL is yet to place its own product on the shelves, analysts project KISCOL sugar products to be in circulation by end of 2015. KISCOL conducted a media campaign early this year.

If KISCOL’s sugar is rolled out in the market at a cheaper price compared to local brands (given the research put into the project by Omnicane), it may spell doom and cast the final nail on Kenya’s inefficient sugar companies, companies like Mumias Sugar that is holding on to survival via Government bail-out.

Kenya remains a net sugar importer, as consumption continues to outpace production, this trend is expected to continue as the country’s sugar sector is uncompetitive compared to regional sectors.

In recent years, the main driver for greater sugar consumption has been the growing population and industrial use. Sugar is the main sweetener in Kenya, as there is virtually no consumption of alternative sweetening products. Per capita consumption of carbonated soft drinks in the country is roughly10-12 litres. In 2016, sugar consumption is expected to rise to 833,520 tonnes (BMI/FAO).

Over the 2014/15-2018/19 period, consumption is expected to grow steadily at 2.0% annually as incomes and population growth drive consumption, while sugar prices will remain fairly low.

Inefficiency, Poor Management pulled down a growing sector

Despite rosy rhetoric from the government, Kenyan Sugar sector has been unable to increase efficiency over the last several years. The government established a Strategic Plan for 2010-2014 with the goal to privatise the five largest sugar mills in the country and to diversify them into ethanol distillery. This has failed to happen.

Kenyan sugar yields and production costs rank among the world’s most inefficient. Estimates range widely regarding the cost of producing one tonne of sugar in Kenya, from $415/tonne to $950/tonne.

The FAO’s conservative estimate of $570/tonne is more than twice as much as production costs in Egypt and compares to an average of $350/tonne in other COMESA countries.
This largely explains the government’s desperate efforts to have the COMESA safeguards extended for another term.

Turf Wars, Lack of Transparency causing Cannibalization of Input Sources

Turf wars between private companies West Kenya Sugar and Butali Sugar dating back to 2010 have not made the Supply story any better.

The two companies have been entangled in Court Proceedings; The Kenyan Parliament has set up Committees to handle the issue, and local politicians have been involved as well.

The Kenya Sugar Board and arbitrator the Agriculture Fisheries and Food Authority (AFFA) have also been dragged in the wrangles that have pitted local farmers against each other.

The saga has also brought up one of many other issues plaguing the sugar industry – cane poaching – a situation where in the absence of its own sugar cane plantations, one sugar miller signs parallel contracts with another sugar miller’s out growers in an effort to increase its own capacity while throwing the other out of business.

The cane poaching menace dragged other sugar millers – Mumias and Nzoia into one of the longest court proceedings in the country.

This case has demonstrated lack of transparency and accounting in licensing sugar millers in Kenya.

The bone of contention is a rule under the Crop Production and Livestock Act that requires that a factory be set up at least 25 kilometres from the location of an existing one. The location of the 4 sugar millers clearly does not meet this criteria and the Kenya Sugar Board Chairman has been put to task several times to explain why a license was granted to new players without considering this rule.

Mumias Sugar – the sweetener turned sour

The once giant and promising Mumias Sugar is today on its knees as Kenyans lose confidence in the company after a KPMG forensic audit revealed mismanagement, and improper market procedures that culminated in the illegal importation of cheap sugar and collusion with top management resulting in 3 year losses, creditors threatening receivership, unpaid farmers’ payments, and Local and International Lenders’ obligations remaining in doubt.

Already dragged through the mud of cane poaching, and having been forced to close the factory several times due to lack of enough sugar cane to crush, the woes facing Mumias resulted in full-year losses for the 2014 financial year rising to Sh2.7 billion from Sh1.6 billion in 2013.

Whereas the government has already started a KShs 5 Billion bailout process for the sugar miller, in conjunction with the company’s lenders, Kenyans will be looking closer at the fallen giant’s management records, as investors in the Mumias Share count their losses following plummeting of its share price from an IPO (Initial Public Offering) price of KSh 50 to KSh 2.50.

The KPMG report and government bail-out conditions: reduction of staff by at least 300, lean management team, recapitalization and prosecution of managers who were part of the mismanagement, are expected to spur life into the ailing giant, though with the COMESA safeguards only extended for a year, the jury is still out on how much a year’s investment can resuscitate the company.